NEW MORTGAGE TO MIX FIXED, FLEXIBLE RATES

A new mortgage product, due out by month's end, will offer borrowers a chance to gain some of the advantages of lower adjustable-rate mortgage rates while avoiding some of the risks.

The loan, called the "stable mortgage" by its creators, is expected to grab some business that would otherwise be done in 30-year, fixed-rate and adjustable-rate mortgages because it combines features of both.

Warren Lasko, executive vice president of the Mortgage Bankers Association of America, predicted that the new product will gain a 15 percent to 20 percent market share "over time."

Fixed-rate mortgages now account for more than half of all mortgages made while adjustable-rate loans represent 20 percent to 30 percent of the total and other variations account for the remainder, Lasko said.

GE Mortgage Capital Corp., which designed the new loan, said at first 250 lenders nationwide will offer the mortgage by February, but he was unable to identify which Washington area firms might do so.

The Federal National Mortgage Association, the federally chartered secondary mortgage market company known as Fannie Mae, has agreed to buy $1 billion of the product, which should translate into about 12,000 to 13,000 loans. Fannie Mae said it will hold the loans in its portfolio.

The loan carries a lower interest rate than a 30-year, fixed-rate loan by 1 to 1.5 percentage points. Recently, that would put the interest rate for the new 30-year loan in the 8 percent to 8.5 percent range.

Still, the interest rate can change annually with fluctuations in money markets, although the loan is not subject to such wide swings as those common with regular adjustable-rate mortgages (ARMs).

The loan's unusual structure accounts for the low initial interest rate and more moderate rate changes, as well as down payments of as little as 5 percent to 10 percent of the house price.

Either a half or a quarter of the amount borrowed, depending on the option chosen by the buyer, is tied to a floating interest rate. The interest on the balance is calculated at a fixed rate.

"The strength of {the} stable {mortgage} is the ability to get families into homes with low monthly payments, while protecting them against payment shock," Gregory T. Barmore said in a statement. Barmore is chief executive of GE Mortgage Capital, a private mortgage insurer.

If the buyer selects the 5 percent minimum down payment version of the new mortgage, 25 percent of the loan will be adjusted to the prevailing interest rate each year. The maximum rate adjustment would be 1 percent annually and 4 percent over the loan's life.

The 10 percent down-payment version, which makes the rate on half of the loan amount adjustable, results in less stable monthly payments, but the initial interest rate is about half a percentage point less than the other option. The annual rate cap is 2 percent and the lifetime ceiling is 6 percent.

On a $150,000 loan, for example, the first-year monthly payment would come to $1,153 at an 8.5 percent starting rate under the 25 percent adjustable-rate plan and to $1,001 at 8 percent interest under the 50 percent adjustable option.

In contrast, the monthly payment on a 30-year fixed-rate mortgage of $150,000 is $1,262 at today's 9.5 percent rate. With a traditional one-year ARM, the monthly payment begins at $1,062 at the prevailing 7.63 percent initial rate.

Paul Havemann, vice president of based HSH Associates in Butler, N.J., a nationwide mortgage rate survey firm, said he believes the new product will appeal to first-time buyers who previously had no choice except to take an adjustable-rate mortgage.

"Many of them would like to have a fixed-rate loan, but they cannot afford it, so they end up stuck with an adjustable. This might actually take some of them out of the adjustable market or woo some buyers {sitting on the sidelines} that might not come in at all," Havemann said.

The president of the National Association of Realtors, Harley E. Rouda of Columbus, Ohio, said he believes the loan also will attract "conservative borrowers who get fixed rates and would prefer the lower rates of an adjustable, but they do not like to gamble."

Several industry observers said they do not expect the stable mortgage to supplant the two-step mortgage, which was first offered last spring. That loan, which provides a half-percentage-point rate break over a 30-year fixed-rate mortgage, combines a seven- or five-year fixed-rate mortgage with an adjustable-rate loan for the remaining loan term.

The two-step mortgage, said Fannie Mae senior vice president Larry Dale, primarily appeals to borrowers who expect to move or refinance within the fixed-rate period of the loan, but want to know they still have financing in place if their plans change.